Negative equity, stagnation in the housing market and increased job mobility are amongst the many factors that have meant more and more people are unwilling or unable to live in their own homes.
But instead of having to give up and sell, the let to buy mortgage provides a viable solution for homeowners in all walks of life.
What is Let to Buy?
Let to buy is the process whereby a homeowner rents out their existing home and uses the income generated to cover the cost of a mortgage on a new residence.
Unlike a buy to let mortgage, let to buy mortgages are used when the homeowner becomes an ‘accidental landlord‘ renting out the home that was initially intended for occupation, whilst still retaining ownership.
Let to buy mortgages open up new options, which is why the popularity of this product is going from strength to strength.
Who Will Benefit from a Let to Buy Mortgage?
There are many groups of homeowners who find a let to buy mortgage attractive:
Those in Financial Difficulty: By choosing a second home with lower monthly overheads, it is possible that the rental income from the initial home can cover all financial commitments costs and may even generate a further monthly income, all whilst still retaining the underlying asset of the home itself.
Those On the Move: Whether you need to move for personal or work commitments, if market conditions make selling uneconomical then a let to buy mortgage can be the ideal solution.
More than 500,000 households in the UK live in negative equity*, meaning that selling would not be an option. However a let to buy mortgage makes it possible to retain ownership of the existing home whilst providing the freedom to find a new property in a location that better suits.
To Break the Chain: If the lack of sale of your existing home presents a barrier to buying your new property, then a let to buy mortgage eases the pain.
Instead of waiting for the sale of your own house, you simply offer your existing home to the rental market and use the proceeds to fund the purchase of your new home.
To Start a New Business: This is especially attractive to more mature couples who both own their own properties before choosing to live together. The rental income from the separate properties can fund the joint home, without releasing ownership, and can also offer the building blocks for the creation of an entire property portfolio.
The Disadvantages of Let to Buy Mortgages
Risk: The key disadvantage of the let to buy mortgage is the increased level of financial exposure. Ultimately the success of this product depends on the continued congruence of rental income and mortgage rates. However if rental incomes drop and mortgage costs rise, it is up to the landlord to bridge any gaps.
Added Responsibility: When taking on a let to buy mortgage, you are also taking on tenants and the costs associated with them. Not only will this include arrangement fees and higher rates of mortgage interest but it will also include the up keep of two properties and the emotional cost of seeing someone else living in a house that was once yours.
How to Make the Most Out of Let to Buy Mortgage
Make Sure You Are In The Right Position: Areas where rental incomes rise at a greater rate than house prices, such as Southampton, Cambridge, Portsmouth and Manchester are ideal for let to buy products. However if house prices rise and rental incomes are very similar, such as in London, yields are low and other alternatives may be more suitable.
Use Your Knowledge: One of the greatest advantages of having lived in the property you now rent out is your own experience. Leave extensive notes on how everything works and keep a database of local reliable tradesmen to ensure any problem is fixed quickly and with minimum costs.
Be Aware of the Legalities: Strict regulations surround every element of rental properties from Energy Performance certificates through to fire safety. Be aware of what is required and how much it will cost to adhere to these standards before taking the plunge.
Get Insured: Make sure you have specialist landlord cover and join an accredited landlord scheme to gain further peace of mind.
Flexibility and innovation in the financial services market is providing a greater range of options for the way we manage our money and our lives than ever before. And let to buy mortgages are just one of these options.
If you need help considering the best way to move forward, contact independent mortgage advisor today to help understand how you can make these new products work for you.